We Energies electricity rates are expected to rise 4.2% on average in 2013, less than the utility sought but more than a key customer group had lobbied for.

The state Public Service Commission on Wednesday approved a $120 million rate increase after siding with the utility on key issues including higher costs linked to the Oak Creek power plant.

The PSC voted to approve a rate increase that was about 26% less than the $151.3 million sought by the state's largest utility. The increase was sought to cover the cost of projects the utility has built, including a $900 million air pollution system at the original Oak Creek coal plant and the Glacier Hills Wind Park.

The commission agreed with the utility that most of the extra costs spent to build the new $2.3 billion coal-fired power plant in Oak Creek were warranted and should be passed on to customers.

The commission also voted to cut local natural gas rates and raise steam rates for business customers in Milwaukee and Wauwatosa.

In a series of decisions, the commission also:

Sided with We Energies and downtown Milwaukee businesses on a proposal that would have ended what one customer group termed unfair subsidies that electric ratepayers have been providing to downtown Milwaukee firms.

Voted to increase by 20% the fixed customer charge on We Energies' customers' monthly bills. The utility had sought a 40% jump.

Approved a nearly 75% jump in the premium paid by more than 20,000 customers who volunteered to pay more to support renewable energy through the Energy for Tomorrow program.

Blocked funding for a utility solar generation project, funds the utility negotiated with environmental groups to pay for projects to clean up Lake Michigan, and ended funding for a renewable energy program that helped churches and nonprofit organizations finance solar panel installations.

Cut $25 million from the utility's staffing and spending forecast, saying We Energies has had a pattern of budgeting for more positions and expenses than it has on staff.

We Energies customers have seen their bills rise faster than inflation over the past 10 years as the utility invested in a power plant expansion program. Utility customers then got a break from an increase in 2012 under a plan We Energies proposed last year.

Overall, customers can expect a 4.2% increase, and a 2.6% increase excluding the cost of fuel burned in the utility's power plants. That's below the 3.6% the utility sought without fuel costs.

Economic forecasters surveyed by the Federal Reserve Bank of Philadelphia are forecasting the cost of living to rise 2.2% next year.

"It's a mixed bag," said Charlie Higley, executive director of the Citizens' Utility Board, a group representing utility customers. "The rate increase is going to be larger than we were hoping for, which will be bad for customers still struggling in this tough economy."

Concern over fixed charge

CUB was happy about certain moves the commission made to limit costs tied to the Oak Creek power plant, but concerned about a 20% jump customers will see on the fixed charge found on monthly bills.

"People who don't use much power will see a large increase in their rates," Higley said, adding there will be less of a price signal to customers to conserve energy.

Residential customers are looking at a roughly 5.5% increase in January, the commission decided, adding about $4.70 a month for customers now paying about $85.44 a month for electricity. Business customers will see increases in the range of 2% to 3%, PSC spokeswoman Kristin Ruesch said.

The commission also approved a 2.6% increase for 2014, or $75 million. That was below the utility's request for a 3.6% increase, or $103.8 million, she said.

We Energies spokesman Brian Manthey said the utility wouldn't comment on the case until the PSC issues a written decision finalizing the case next month.

On the Oak Creek power plant costs, the PSC voted to approve $141 million in higher construction costs but either rejected or delayed funding for We Energies for another $53 million, Ruesch said.

The price of the power plant topped $2.3 billion, about 8% above the target amount.

The PSC reviewed the higher amounts and determined the utility could recoup most of what it sought, including $44.9 million tied to litigation that delayed the start of construction of the power plant. Also approved were the utility's $72 million settlement with the general contractor, Bechtel Power Corp., as well as $12 million spent in legal fees to defend the utility against Bechtel's more than $500 million claim.

The legal fees were justified given the outcome of the case, the commission found.

"This was a very, very large claim," said commissioner Ellen Nowak. "The settlement they got was 14 cents on the dollar, and that was hard to beat."

But the commission barred the utility from having customers pay for nearly $10 million of extra costs linked to a railroad crossing in Caledonia and expenses for a U.S. Army Corps of Engineers permit.

Also Wednesday:

The PSC allowed We Energies to discontinue its "energy partners" program that charges residential customers less if they agree to let the utility shut off their air conditioner during times of peak energy use.

We Energies said the program was too costly to administer.

The commission denied $3 million in funding for Lake Michigan projects that We Energies committed to as part of a deal to settle lawsuits challenging the type of cooling system We Energies used in the Oak Creek power plant.

That settlement had called for a commitment of $120 million over 30 years by We Energies and the other co-owners of the plant. We Energies did not make its payment to the fund in 2012, and the fate of the Lake Michigan fund was unclear late Wednesday.